Buck Bond Group
Improving value and outcomes from your workplace pension through consolidation

Improving value and outcomes from your workplace pension through consolidation

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The Government expects all DC schemes to deliver good member outcomes.  Those managing Own Trust DC arrangements with less than £100M will have to choose either to meet new minimum governance standards or consolidate into larger schemes, and the Department for Work and Pensions expects decisive action. For many schemes, this will mean making some big decisions on whether to make changes to their current approach or to consolidate into other arrangements, making the next 12 months a critical time. Opting to continue to govern an Own Trust DC arrangement is a huge responsibility and one that should not be taken lightly!

Own Trust DC arrangements with less than £100M of assets have seen increasing compliance burdens including increased reporting requirements via their ‘Chair’s statement’ to show investment returns net of specified costs and additional value for money disclosures at the end of 2021, together with higher governance constraints with the introduction of The Pension Regulator’s single code of practice as well as climate change disclosures.

If the new value for members assessment determines trustees are not delivering good value for members, then trustees must take immediate steps to improve the scheme to meet the value for members criteria within a reasonable period or wind-up and consolidate into an alternative arrangement, such as a Master Trust.

Why review your retirement savings vehicle?
Own Trust DC arrangements offer the maximum flexibility for employers, but often at the highest cost. They also come with increasing compliance and governance requirements, adding further cost and risk.

Prior to the recent pandemic, employers were already seeking alternative options to deliver the same high quality pension options to their people in a more cost-effective way. This has been accelerated due to the global events of the past two years, resulting in an increased focus on costs. From an employer perspective, consolidation can ease governance burdens and advisory costs.

For organisations moving away from an Own Trust DC arrangement, Master Trusts have become increasingly popular. A Master Trust is a similar legal structure to an Own Trust DC arrangement, but it has a single trust covering multiple employers. It has the advantage of offering comprehensive governance, broad retirement and investment options, better value for money for employers and employees with the added benefit of enhanced online tools and communications. All of these are so important to facilitate good outcomes, but are areas which smaller schemes can struggle to secure on their own terms. A bulk transfer of existing assets is also possible from an Own Trust DC arrangement to a Master Trust, without requiring the individual member consent which would be required for a Group Personal Pension Plan.

We expect a large number of Own Trust DC arrangements to consolidate in the short term, with the majority opting for a Master Trust. Larger schemes with over £100M of assets will no doubt be influenced by the substantial market shift towards Master Trust provision even though they aren’t yet being pushed to consolidate. Further, in its recent call for evidence the Department for Work and Pensions put forward a case for greater consolidation looking at how DC schemes with assets of up to £5bn could be encouraged to consolidate, making it clear what the future regulatory intention will be.

Steps to success
Consolidation often involves multiple stakeholders, namely scheme sponsors, advisers, employers, third-party administrators, lawyers and trustees. So, it’s important to make sure everyone is clear on what’s happening, when and why.

The consolidation process can take time, so it’s wise to plan ahead and have regular meetings with stakeholders and manage expectations. Having one person who oversees the process from start to finish and sticking to an agreed timeline will help maintain momentum, minimise duplicated effort and potentially shorten the process.

Managing consolidation through careful planning can help keep costs down. Costs to consider can include, legal and professional advice, data cleansing (especially for deferred members), communications and asset disinvestment charges.  It is also worthwhile checking with any prospective new provider to see what implementation support is offered and if this involves cost.

There are a number of critical steps in selecting, implementing, communicating and monitoring a new pension scheme.  Any new DC plan should reflect an employer’s and trustees’ key criteria and objectives for retirement savings and wider financial wellbeing. Employees will want a modern pension arrangement that provides good value for money and supports them in saving for their future.

Stage 1: Strategic objectives:  Identify which DC scheme type is the best fit for your overall objectives.

Stage 2: Provider selection.  Based on objectives and criteria from stage one, review the DC market for the best provider for any new DC Plan ensuring any bespoke needs can be provided. Be sure to check that the provider can demonstrate commitment, scale and forecasts for growth to sustain a long-term proposition as well as having strong governance in place.

Stage 3: Communication and Implementation:  Consult with all employees on the changes to pension arrangements and then working with the chosen provider to successfully implement and launch the new arrangement.

Stage 4: Consolidation of existing benefits.  Undertake a bulk exercise to assist individuals in consolidating existing benefits in the new arrangement.

Stage 5: Governance and employee engagement:  Monitor the new arrangement to ensure ongoing value for money and  engagement with employees to improve outcomes.

Transferring DC assets into an arrangement such as a Master Trust can be a complex process, and should be planned in detail by employers and trustees of schemes contemplating this.  In particular, there are some tricky legal and tax hurdles to overcome for hybrid schemes with DB and DC sections and for DC schemes which have any kind of guarantees wishing to transfer their DC section to a Master Trust. There may be other options which should be considered in these cases.

Deciding whether to govern or consolidate is not straightforward. What’s clear is that decisions should take into account the impact on both scheme sponsors and trustees and most importantly, be centred around members’ best interests!